The rating agency has revised the Portuguese GDP growth forecast above its previous estimates, expecting a 1.6% growth. The delay in ECB's interest rate hikes is anchoring debt servicing costs.
Fitch is expecting the Portuguese economy to grow above its previous forecast, in 2019. However, the rating agency’s estimates are still way below those presented by the Government, standing at 1.6% for 2019, and 1.3% for 2020. The economy is expected to slowdown, which will be a test to the budgetary consolidation efforts of Costa’s government right before the elections take place.
“We remain relatively upbeat on the Portuguese economy, having recently increased our real GDP growth forecast for 2019 to 1.6% from 1.5% previously”, says Fitch. In fact, this is proved by their upward revision of the Portuguese GDP growth estimates, now expecting a 1.6% growth for 2019, in comparison to the previous 1.5% estimate. Still, this estimate highly contrasts with that of the government, which stands at 2.2% for 2019. As for 2020, Fitch maintains its 1.3% GDP growth projection.
“The major factor underpinning the increase to our 2019 real GDP growth forecast is a shift in our expectations for the ECB monetary policy“, the agency notes. ECB’s decision to delay the rise in its interest rates to 2020, will help “anchor debt servicing costs of the Portuguese government and of the private sector, both highly leveraged, and this will in turn support domestic consumption”.
Considering that both the state and individuals are highly indebted, the delay in the increase of ECB’s interest rates will prove beneficial for the country’s economy. Savings with interest rates will be “directed towards private consumption”, the agency noted, which will also boost the economy.
With lower interest rates, the investment rate will also accelerate. Fitch is optimistic about the infrastructure investment perspectives in the country, namely housing construction, but also agriculture. They highlighted the sector as a “bright spot for real GDP growth over the coming quarters, as investment flows into newly-viable farmland” have the potential to shine due to Alqueva’s dam completion.
Economic slowdown will test the government’s commitment to fiscal consolidation
On the note updating their forecast of the Portuguese economy, Fitch’s team also drafted a political risk analysis, reflecting on the country’s’ political context and its impact on the economy. Fitch expects the ruling coalition, led by the Socialist party, to be reelected for a second term, with elections taking place on October 6.
The economy is “likely to prove supportive for the PS’s electoral prospects”, and although the PS is “unlikely to win an outright majority, it appears likely that its coalition with the Left Bloc (BE), the Communist Party and the Green Party will hold”, especially after al members voted in favour of the 2019 budget, aiming at narrowing the deficit.